www.taxprofessionals.com - TaxProfessionals.com
Posted by Abundant Wealth Planning LLC

What You Need to Know When Preparing Your Business For Sale

What You Need to Know When Preparing Your Business For Sale

Selling a business is often the most important decision an entrepreneur makes. Managing a sale process is both emotionally demanding and time-consuming (this is the time away from running the business). Taking steps to adequately prepare your business for a sale well before a buyer is on the horizon will make things much easier once the sale process is underway.

The best way to adequately prepare for a sale is to perform a bogus legal due diligence test that a knowledgeable buyer would probably want to do. This simulated execution will eliminate any issues you need to resolve before any sales process and should facilitate a smoother, less stressful, and time-consuming transaction. Importantly, this should also help maximize the offer's value, preventing buyers from having difficulty lowering the price or claiming potentially costly damages.

So here are some of the main areas we suggest for simulation, ideally with input from your business advisors.

1. Tax structuring and planning

When you sell your business, you will need to consider the tax implications of this decision. Whether the sale is structured as an asset sale or share sale, HMRC will normally be entitled to a share of the sale proceeds it receives. However, with a little planning, it may be possible to restructure the business to maximize any possible help available. It is important to get tax advice as soon as possible to ensure you take advantage of any tax benefits that may be available.

2. Financial information

Ensuring that your financial information is organized and accurately reflects the company's financial situation is essential to any sales process. Any buyer will look for financial information demonstrating consistent revenue streams, growth, and long-term earnings. Depending on the business in question, you may want an experienced CFO to review the business and examine it from a financial health perspective to ensure everything is in order. As a starting point, you should ensure that your financial information includes 

(a) Historical accounts, preferably for at least the past three years, detailing business results and profits

(b) Asset valuations 

(c) Up-to-date management records and accounts; and 

(d) Details of existing financial arrangements.

3. Ownership

Many small and medium-sized businesses depend on the experience and knowledge of their owners. Potential buyers will want to be sure that the value of the business does not drastically decrease without responsible owners. By reviewing and, if necessary, strengthening the management team, it should be possible to help a buyer feel confident that the business they are acquiring will at least retain its value once completed.

Another very important ownership issue is to ensure that minority shareholders and majority shareholders are aligned in their sale commitment and that the company's shareholders' agreement contains adequate deferral clauses in the event of last-minute fluctuations.

Also, check that all company house records are up to date, that the company books are correct, and that shareholders know where their share certificates are.

4. Employees

In addition to the management team, a buyer will want to know the company's key employees, their employment contracts, and what arrangements are in place to encourage them to stay in business after the sale. Suppose key employees are still not incentivized beyond their standard terms of employment. In that case, you may want to consider what provisions can be put in place to protect employees and ensure their interests are aligned with yours. You must ensure that all employees have entered into appropriate employment contracts containing the necessary provisions to protect the company in the event of an employee's dismissal.

5. Contracts

It is important to have copies of all major trade agreements. It is common for companies to be unable to identify key business agreements or, in certain circumstances, find themselves in a situation where key business agreements are not documented. Reviewing the current agreements will help you identify potential areas of concern, whether poorly worded terms and conditions or changes in control provisions that could lead to termination of the contract when selling the company. Identifying problems before starting a sales process will give you time to take the necessary steps to correct them before you take your business to market.

6. Information Technology and Systems

Depending on the nature of your business, IT systems and data may be at the top of a buyer's priority list during due diligence. You must be able to provide the buyer with details of all existing computers and other systems, together with supporting documentation detailing system elements that are 

  1. Shared with third parties 

  2. Subject to licensing

  3. Developed for the Company by a third party and/or 

  4. Owned by a third party.

7. Website and digital platforms

It is important to ensure that all websites and digital platforms for your business operations are legally adequate and contain all applicable privacy policies, notices, terms and conditions, and disclaimers. You need to check that the content on the site doesn't leave your business vulnerable and that if a third party hosts it, the hosting agreements are solid and don't have inappropriate compensation thresholds. It's also important to ensure that all domain names are owned or controlled by the company, as it's surprisingly common to find them registered with the names of people who are no longer part of the company.

8. Company assets

Any buyer will want to be sure that the main assets of the business are located within the business, that they belong to the business, and that they are not subject to any third-party property rights. When a third party owns an asset, the buyer will want to ensure that the company has the contractual right to use the asset in question. The best thing to do is to take an inventory of all business assets and check that leases, title deeds, licenses, and registration certificates are in order.

9. Regulatory authorizations and licenses

Depending on the nature of your business, you may need specific regulatory licenses or approvals. If so, you should ensure that they have been properly obtained, updated, and available for inspection by the buyer. Failure to obtain the proper permits and licenses may result in a delayed or abandoned sale.

10. Compliance and Procedures

It is important to verify that all compliance policies and procedures, such as anti-corruption and data privacy, are up to date with applicable law and fit for purpose.

11. Insurance

You must ensure that your business insurance is adequate for the risks associated with your business. A buyer expects copies of all current insurance policies, details of any claims made by the business, and whether the business's insurance covers them. Depending on the nature of your business, it may be appropriate to engage a specialist to review your commercial insurance to determine if the business has an appropriate level of cover, given the nature of the business and the associated risks. 

12. Evaluation

Although a sales process can be a little tricky, it is worth getting a professional assessment of your business from an expert. This will help you manage expectations with stakeholders and give you a benchmark for allowing individual shareholders to obtain tax planning advice.

13. Transaction Advisors

Legal, tax, and financial advisors can play an important role in preparing your business for sale. This is a time for experts, and it is worth investing effort in identifying, selecting, and recommending transaction advisors with real experience and success in managing the sale of similar businesses.



Abundant Wealth Planning LLC
Contact Member